Final answer:
Overstating inventory results in understating COGS, leading to an overstatement of net income and retained earnings. Therefore, the financial statements for year 1 would show inaccurate higher earnings and retained earnings. The self-check question's accounting profit is $50,000.
Step-by-step explanation:
When Glimmer Corp. miscounts and overstates its ending inventory in year 1 by $10,000, it affects the financial statements incorrectly. An overstated inventory leads to a lower cost of goods sold (COGS), which in turn, causes the net income to be overstated. As a result, retained earnings would also be overstated, not understated. The reason for this is because the ending inventory is an asset, and when it is overstated, the expenses are understated, which leads to higher net income and subsequently higher retained earnings for that period. Therefore, neither C (understate retained earnings $10,000) nor E (understate net income $10,000) are correct.
Referring to the self-check question provided, the firm's accounting profit is calculated by subtracting explicit costs (sum of costs for labor, capital, and materials) from total revenues. The accounting profit would be $50,000 calculated as follows:
Accounting Profit = Total Revenues - Explicit Costs = $1,000,000 - ($600,000+ $150,000+ $200,000) = $50,000.